Federal Reserve leaves US interest rates on hold; QE purchases to end in March – business live

• 8.28pm GMT 20:28 Stocks fall as Powell sees 'quite a bit of room' to raise rates
• 8.09pm GMT 20:09 Powell: Fed is of a mind to raise rates in March
• 7.09pm GMT 19:09 Federal Reserve leaves US interest rates on hold
• 4.47pm GMT 16:47 FTSE 100 closes higher
• 4.26pm GMT 16:26 UK public's inflation expectations hit record high
• 3.57pm GMT 15:57 Brent crude hits $90/barrel, first time since 2014
• 3.10pm GMT 15:10 Bank of Canada holds interest rates, but increases are coming...

19:09

Updated at 7.17pm GMT

Stocks have fallen into the red on Wall Street, after Fed chair Powell suggested there is ‘quite a bit of room’ to raise interest rates without threatening the labor market.

Jerome Powell is sounding hawkish as he is quizzed by reporters about the Fed’s plans.

He suggests there is a lot of room to increase interest rates without hurting the jobs market, and doesn’t reject the idea that interest rates could rise at consecutive meetings

[the Fed has eight scheduled meetings a year, and analysts had thought rate rises could come at every other meeting].

Asked if the FOMC could raise interest rates by 50 basis points, rather than 25 basis points, Powell says he can’t say what the precise path will be, and such decisions haven’t been taken.

But the Fed is aware this is a different expansion than in previous cycles. There is higher inflation, higher growth, and a much stronger economy. That is likely to be reflected in the policy path.

Jerome Powell doesn’t have much more information on the Fed’s approach to reducing its balance sheet, on top of the principles published today.

Policymakers haven’t had much discussion about the details yet, he explains, but will spend time on it at coming meetings.

But he does suggest the Fed could perhaps move sooner and faster than before. The economy is in a different place than in 2015, the last time it began tightening monetary policy.

Jerome Powell explains that both sides of the Fed’s mandate (price stability and maximum employment) are calling for a move away from highly accommodative policy.

There is ‘broad agreement’ on the FOMC that it will soon be time to raise rates, he explains.

And that first rate rise could come in March, Powell signals, despite the impact of Omicron, and global risks.

He says:

“I would say the committee is of a mind to raise the Federal funds rate at the March meeting, assuming that conditions are appropriate for doing so.

We have our eyes on the risks, particularly around the world.

We do expect some softening in the economy from omicron, but we think that should be temporary and we think the underlying strength of the economy should show through fairly quickly after that.

Federal Reserve chair Jerome Powell is holding a press conference now to explain today’s decision.

He says the US economy has shown great strength, cautioning that the omicron variant will hurt economic growth in the current quarter, but is also expected to drop off rapidly.

If the latest wave of Covid-19 passes quickly, then the economic impact should dissipate too.

The labour market has shown remarkable progress, Powell continues, with historically strong labour demand and wages rising at the fastest pace in many years.

Prices are also rising fast, of course. And here, Powell says high inflation has spread more broadly, but is expected to decline over the course of the year.

And in the light of inflation and employment developments, the economy no longer needs sustained high level of support, he explains - adding that the Fed needs to be nimble and remain attentive to risks.

The Fed has also issued a statement outlining its principles for reducing the size of its balance sheet.

This is the process of unwinding some of the asset purchases which were conducted in the pandemic to support markets and lower long-term borrowing costs, after those purchases are phased out in March.

Those principles show that the Fed expects to “significantly” reduce its balance sheet, and that the process is expected to begin after it has started raising interest rates.

Here’s the list, which doesn’t appear to have any surprises:

• The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.
• The Committee will determine the timing and pace of reducing the size of the Federal Reserve’s balance sheet so as to promote its maximum employment and price stability goals. The Committee expects that reducing the size of the Federal Reserve’s balance sheet will commence after the process of increasing the target range for the federal funds rate has begun.
• The Committee intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).
• Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.
• In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
• The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.

Stocks on Wall Street are still up for the day, with the Nasdaq Composite up 2.5% or 351 points at 13,888.

Financial experts broadly agree that the Fed is signalling that it will raise interest rates in March. Here’s some snap reaction:

America’s central bank has left interest rates on hold, and signalled that it expects to start raising borrowing costs soon.

Following a two-day policy meeting, Federal Reserve policymakers decided to maintain its key interest rate at its current record low of 0%-0.25%. But they believe it will ‘soon be appropriate’ to raise rates.

The FOMC also decided that it will continue to reduce the pace of its bond-buying stimulus programme, ending the asset purchases in early March.

It says:

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent.

With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.

The FOMC also said that economic indicators show the economy continues to recover from the pandemic, with the US jobless rate dropping to 3.9% last month.

Indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases. Job gains have been solid in recent months, and the unemployment rate has declined substantially.

Inflation, though, has hit a forty-year high of 7% - which the Fed says is partly due to the supply chain imbalances caused by Covid-19:

Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy continues to depend on the course of the virus.

The easing of Covid-19 travel rules has helped to push oil to seven-year highs tonight, says Fawad Razaqzada, analyst at Think Markets.

Opec’s policy of only slowly increasing production each month has also driven up prices, creating a tighter market. But the cost of living squeeze may make it harder for oil to stay higher in the long term, he explains:

Crude oil prices have extended their upsurge and Brent has breached the psychologically-important barrier of $90 per barrel. The latest gains came despite an unexpected build in US oil stocks, suggesting the upward pressure is continuing to come from elsewhere. There is definitely an element of geopolitical risks being baked into energy prices right now, as tensions concerning Russia and Ukraine intensify. Additionally, the easing of travel restrictions across Europe has helped to boost demand expectations for crude oil. More to the point, the OPEC+ has continued to provide less oil than called on for, creating a tighter market than would have otherwise been the case.

But with inflation continuing to eat into consumers’ disposable incomes, further rises in fuel and energy prices may not become sustainable in the longer-term outlook. Crude prices will have to correct themselves because of demand concerns, if consumer incomes, already stretched due to inflation, are squeezed even further. The OPEC+ may also respond by releasing more oil back to the market as they have clearly met – and exceeded – their main objective: higher crude prices.

Stock markets across Europe have rallied, with the pan-European Stoxx 600 index having its best day since early December.

The Stoxx 600 gained 1.68% today, led by the energy sector, real estate firms and consumer cyclical stocks, followed by industrials, miners, financial stocks and tech.

Germany’s DAX gained 2.2%, while France’s CAC rose 2.1%, ahead of the FTSE 100’s 1.3% gain.

Michael Hewson of CMC Markets sums up the day:

A decent performance from energy and financials helped to support the FTSE100, with firmer energy prices and yields driving the gains on the UK index, with Shell hitting its highest levels since February 2020 and BP also higher.

We’ve also seen a belated bounce in travel shares after the uncertainty at the beginning of this week, as the imminent dropping of testing for fully vaccinated passengers sees a sharp rally in the likes of IAG, easyJet and Holiday Inn owner IHG.

Britain’s FTSE 100 index has racked up its best day in three weeks, as markets recover their nerve after a choppy January.

The blue-chip index has closed 98 points higher at 7,470 points, up 1.33% today.

IAG, which owns British Airways, led the risers, up 7.4% on optimism for a recovery in the travel sector this year.

Oil company Shell gained 5.6%, as the jump in crude oil prices will boost its profits.

Online grocery group Ocado rallied 5.7%, after announcing it has developed new robots to enable cheaper, faster deliveries, and require fewer staff in its warehouses.

At a launch event today, Ocado outlined how it was making its ‘grid’ systems cheaper, lighter and more efficient, as it looks to licence its robotic warehouse systems to more retailers.

The UK public’s inflation expectations have hit record levels, as people feel the effect of more expensive food, energy, goods and services.

The latest monthly survey from Citi and YouGov shows that people expect inflation to run at 4.8% over the next year, the highest since the survey began in late 2005.

That’s more than double the Bank of England’s inflation target of 2%, and not far from December’s 30-year high of 5.4%.

Longer-term inflation expectations also remained at record levels. Over the next five-to-ten years, those surveyed expect inflation to be 3.8% - matching last month’s reading.

“Today’s data, especially the level of long-term expectations, suggest elevated risk inflation expectations could become de-anchored to the upside as inflation accelerates in the months ahead,” Citi economist Benjamin Nabarro said.

“However, for now, we think expectations remain anchored overall.”

Brent crude oil has just hit $90 per barrel for the first time in over seven years.

The benchmark oil price has gained almost 2% today, a move that will add to inflationary pressures in the economy, and the cost of living squeeze in the UK, and beyond.

Prices have been pushed up by concerns over supply constraints, as demand increases, and the escalating tensions between Russia and NATO members over Ukraine.

Brent has now gained 14% this year, points out Victoria Scholar of Interactive Investor, who says it could see further gains:

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, warns that motorists will face higher fuel bills:

“Consumers are belting up and bracing themselves for a fresh squeeze in the cost of living as a jump in the oil price is set to see forecourt prices ticking up again. With price rises coming from all directions, the prospect of filling up at the pumps becoming yet more expensive will be hard to swallow, especially for commuters steeling themselves for the return to the office as plan B restrictions are lifted.

Although the price of a barrel of Brent won’t immediately translate to mirror a similar price hike at the pumps, due to other factors to consider, such as refining capacity and demand for other oil fractions, petrol prices do follow oil’s trajectory albeit on a flatter curve. After Brent reached a three year high in October of $86.9, prices at the pumps hit a 12 month high a few weeks later of 147.72p and diesel at 150.96p. Already prices are edging back close to those levels, with average petrol prices at 146.06p and diesel 149.42p, according to the RAC.

Sales of new US single family homes in December have risen to their highest level in nine months.

Sales rose 11.9% last month, compared with November -- but were still 14% lower than a year earlier.

Buyers took advantage of lower prices, with the median sales price dipping amid anticipation of higher interest rates.

Chad Moutray, chief economist at the National Association of Manufacturers, has tweeted the details:

The Bank of Canada has left interest rates on hold, at its monetary policy meeting today, but signalled that a rise is coming.

The Bank of Canada decided to keep its key interest rate at 0.25%, despite Canadian inflation hitting 30-year highs last month, citing the disruption caused by Omicron.

But, the BoC’s governing council also expects that interest rates will need to increase in future. It has removed its commitment to maintain rates at the effective lower bound, having concluded that economic slack has been now absorbed.

Announcing today’s decision, the BoC says:

CPI inflation remains well above the target range and core measures of inflation have edged up since October.

Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period.

Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.

Wall Street has jumped at the start of trading, as technology stocks recover some ground after strong results from Microsoft last night.

The Dow Jones industrial average of 30 large US companies has risen by 447 points, or 1.3%, to 34,744 points, as investors await the Federal Reserve decision later today.

The tech-focused Nasdaq has rallied by 2.2%, having been through a rocky start to the year.

The mood has improved after Microsoft reported better-than-expected earnings and revenue for the fiscal second quarter last night, alongside a sales forecast that also exceeded estimates.

MS’s shares have jumped over 4% in early trading, after CEO Satya Nadella forecast continued strong demand for a wide range of digital services, including cloud computing services for businesses, and gaming.